Ascott Residence Trust 3Q19 - UOB Kay Hian 2019-10-31: Merger To Further Enhance Scale & Diversification

ASCOTT RESIDENCE TRUST (SGX:A68U) | SGinvestors.io ASCOTT RESIDENCE TRUST (SGX:A68U)

Ascott Residence Trust 3Q19 - Merger To Further Enhance Scale & Diversification

  • Ascott Residence Trust reported DPU growth of 5% y-o-y. Belgium, Spain, the UK and Vietnam contributed to the good performance. Distributable income was boosted by a one-off partial distribution of $4m in gains from the divestment of Ascott Raffles Place.
  • Ascott Residence Trust has debt headroom of S$1.1b for yield-accretive investments. Unitholders have approved the merger between Ascott Residence Trust and Ascendas Hospitality Trust and the combined entity is expected to begin trading on the SGX on 2 Jan 20.
  • Maintain BUY. Target price: S$1.66.



3Q19 RESULTS


European markets performed well.

  • Gross profit increased 1.4% y-o-y to S$65m in 3Q19. For key countries, gross profit increased 1.4% y-o-y for the UK (higher corporate and leisure demand) and 7.4% y-o-y for Vietnam (higher corporate demand) in Singapore dollar terms.
  • Smaller markets, such as Belgium (+27% y-o-y) and Spain (+17% y-o-y), also contributed. Gross profit for Singapore declined 20.2% y-o-y due to the divestment of Ascott Raffles Place Singapore.

Overall RevPAU decreased slightly by 2% y-o-y to S$155 due to weaker exchange rates.

  • The UK (+9%), Vietnam (+9%), Singapore (+2%), Japan (+2%) are among the best performing markets in terms of RevPAU growth in local currency terms.
    • The UK portfolio is expected to maintain its momentum due to higher corporate and leisure demand, and events such as the UEFA Euro 2020 should provide some uplift to hotels in London. The weak pound will also boost inbound leisure travel to the UK.
    • Vietnam registered an increase in visitor arrivals of 28.8% y-o-y in 9M19. Hanoi continues to be a top destination for investments from multi-national companies, which augurs well for demand for serviced residences.
    • Singapore benefits from government’s tourism initiatives and limited supply of new hotel rooms.
    • Japan saw strong leisure demand with an uplift from the Rugby World Cup held in Sep 19. Japan will benefit from Tokyo Olympics and Paralympics in 2020.

Global presence provides diversification.

  • About 40% of 3Q19 gross profit came from stable income from properties on master leases (S$10.0m or 15% of total) and management contracts with minimum guaranteed incomes (S$16.4m or 25% of total gross profit). The ss profit of S$38.6m (60%) was derived from serviced residences on management contracts.
  • Australia (-15%), China (-6%) and the US (-6%) saw the large RevPAU declines among major markets.
    • For Australia, this drag could have been attributed to weaker leisure and corporate demand in Melbourne.
    • For China, this was due to softer corporate demand as US-China trade tensions resulted in less business travel volume.
    • Likewise, geopolitical uncertainties affected US properties and this was further compounded by competition from new supply.

Low effective cost of borrowings at 2.1%.

  • Ascott Residence Trust has issued a new tranche of perpetual securities at a lower fixed rate of 3.88%, which was utilised to fund the redemption of the existing S$150m 5.00% perpetual securities at its first call date in Oct 19. Management estimates savings of about S$1.7m per year.


STOCK IMPACT


Synergistic merger with Ascendas Hospitality Trust.


Room for inorganic growth.

  • Ascott Residence Trust has debt headroom of S$1.1b for yield-accretive investments. It is on the lookout for quality assets in Europe and the US. lyf one-north, its maiden development project and co-living property, is on track to open in 2021.


EARNINGS REVISION/RISK

  • We maintain our existing earnings forecasts.


VALUATION/RECOMMENDATION



SHARE PRICE CATALYST

  • Contributions from yield accretive acquisitions.
  • Contribution from lyf one-north, its maiden development project.
  • Increased contributions from newly-refurbished properties.





Jonathan Koh UOB Kay Hian Research | Loke Peihao UOB Kay Hian | https://research.uobkayhian.com/ 2019-10-31
SGX Stock Analyst Report BUY MAINTAIN BUY 1.66 UP 1.540



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